One of the biggest hurdles in implementing or updating a gift card program is optimizing best practices for gift card accounting. This is because some of these new growth channels have both discounts and extra fees associated with them. Accounting practices can make the difference between a highly successful revenue generating program and one that has a negative impact on both a company and individual careers.

Let’s take a look at one of two crucial issues of gift card accounting: how to fund a discount. In the post, we’ll discuss how to track breakage.

How to Fund a Discount

As the overall amount of discounted sales grows, it has become increasingly important to know who is going to pay for the difference in the amount received from the retail channel and the amount paid out to consumers. Funding becomes more complicated as the nature of the discount shifts from expense to revenue reduction. Companies may also wish to attribute revenue reduction to the redeeming entity, such as a franchise store, because that’s where revenue occurs.

Here are three models to consider:

Corporate – Taking the discount as a marketing expense will eat away at a larger share of the already over-taxed marketing budget. It’s preferable for marketing to apply the gift card discount as an overall reduction in revenue.

The Redeeming Store – In this model, a tariff is levied on the redeeming store. For example, with a 3% tax, a redeeming store would receive 97% of the face value of the redemption — $9.70 transferred to store for a $10 redemption. However, the tariff must be fair at the store level. The organization must know what percentage of gift cards are sold through which channel: store, web, promotional, third-party retail, or Costco. This makes the discount very hard to predict.

For example, three different Paytronix customers from the same type of chain had average discount rates that varied from 0.99% to 4.76% to 10.66%. If the discount is difficult to predict, so is the uniform tariff. It’s also hard to make the tariff fair on a regional or franchise level when the discounts may be concentrated in specific geographies.

Gift card redeeming store via per card basis – Here a proportional share of the revenue or expense is allocated based on where the card was sold. A card sold in a restaurant with no discount would be refunded in full, while a card sold in Costco at a 40% discount would be handled differently. In this case, settlement using discount tracking per card allocates a proportional share of the revenue or expense.

Paytronix recommends this third card-by-card settlement model because it best matches accounting rules for today and the future. It’s fair — the beneficiary of the gift card pays a proportional share of the sales channel cost — and it’s sustainable and scalable as the gift card program grows.

Stephen Stone is a content marketing specialist at Paytronix. With a Bachelors Degree from Fitchburg State University and a Masters in Communication Management from Emerson College, Stephen is well-versed in all things communication.

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